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Economics of National Socialism in Pre-war Nazi Germany

This essay will examine Nazi Germany in light of the economic and social theories of Friedrich Hayek. Further, an argument will be made that the Germans economically thrived under National Socialism.

Friedrich Hayek advocated limited government. Governments should regulate the monetary system and prevent of monopolies. Wealth distribution, excessive regulation, assignment of jobs, or otherwise anything that attempts to control the free market will deprecate into tyranny and dystopia.

“The fundamental principle,” Hayek writes in The Road to Serfdom, “in the ordering of our affairs [is that] we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion.”[i]

For these reasons Hayek is weary of National Socialism. The ideology is a combination of two collectivist ideologies: Nationalism and Socialism.

A Nationalist society is concerned with the preservation of culture, history, and consider their society superior to others. A nationalist populace finds their identity in the state. They do not hesitate to protect their nation. In the case of Nazi Germany, protection meant dominating the nation states around them.

A socialist society is owned by the collective populace. It has forms of wealth redistribution. The spending on public works like libraries, schools, and militaries, and the employment of government workers is common place in socialist societies. Modern societies practice a variety of socialist policies. Any country that taxes their citizens to employee other citizens for public works is practicing Socialist policies.

Both Nationalism and Socialism ideologies are forms of collectivism, so National Socialism is like collectivism squared.

Modern societies are within a spectrum of nationalist and socialist tendencies. The United States is a socialist state by definition, boasting large amounts of government spending.

To give an example of the importance of socialist policy and wealth distribution, consider how militaries are sustained. Militaries are completely supported by the tax payers. In turn, the tax payers have protection from potential threats. If a country does not have a military, then it is susceptible to being taken control of by a domineering society that has a military.

Militaries play a vital role in keeping unemployment levels low. The military provides an opportunity to uneducated men to gain a moderate income that can support a family. Accessible job opportunities for uneducated men is greatly important for keeping the family unit together. A lack of employment results in a severe social breakdown and discomfort. [Further reading on this point]

Nazism appealed to the widespread angst the German people felt after the heavy losses of World War I. The war had economically depleted them. The war crimes and debt placed on them caused an intense inflation of their money, which caused all the savings of the private German citizen to be effectively worthless. The National Socialist movement promised economic recovery and to restore Germany to it's former glory. ​Image: German children use bundled inflationary money as blocks, 1923​Conventional wisdom states that nothing good can come out of National Socialist policies. However, many look past the economic success Germany achieved during the thirties. While capitalist countries were in a depression, Nazi Germany was booming.

“I will explain to you now Germany's great secret” wrote the famous chemist Wilhelm Ostwald, “we, or perhaps the German race, have discovered the significance of organization. While the other nations still live under the regime of individualism, we have already achieved that of organization."[ii]

The Nazi era of organization officially started on January 30, 1933 when Adolf Hitler became Chancellor of Germany. It was a time of economic depression across the world, which was primarily the result of a lack of jobs that the fallout of WWI left and the stock market crash of 1929. Days after his election, Hitler would address the nation by radio and say that the new government would,

“Achieve the great task of reorganizing our nation’s economy by means of two great four-year plans. The German farmer must be rescued to maintain the nation’s food supply and, in consequence, the nation’s vital foundation. The German worker will be saved from ruin with a concerted and all-embracing attack against unemployment.”[iii]

The regime solved the problem of unemployment by issuing large government borrowing and spending. Some of the government works included highway systems, housing, and railroads; the private industry was subsided as well with tax rebates and marriage loans for newlywed Aryan couples.[iv]

An argument for this economic success may be attributed to rearmament. The German state required all men to serve two years in the military, and the employment of men to produce warships and other armaments did occur. All of this taking place in violation of the terms Germany signed under after WWI.

According to British Historian A. J. P. Taylor, the Reich’s economic success lied in the general government spending, ”Germany’s economic recovery, which was complete by 1936, did not rest on rearmament; it was caused mainly by lavish expenditure on public works, particularly on motor roads, and this public spending stimulated private spending also.”[v]

The economic prosperity the Reich produced reached into many sectors of German life. There were six million jobless Germans at the start of 1933, but by the end of 1937-8 there was a labor-shortage. During this period, citizens that made up the highest tax brackets increased by 445 percent, while the citizens in the lowest bracket increased by five percent. From 1933-8, the German population’s food consumption rose by one sixth; their wine consumption rose by 50 percent; their crime dropped and tourism doubled; their birth rate rose 22 percent within a year of Hitler’s election; and their car ownership tripled while the exportation of German manufactured cars rose eight-fold. [vi]

“[Hitler] has achieved a marvelous transformation in the spirit of the people, in their attitude towards each other, and in their social and economic outlook.” Wrote Britain's WWI Prime Minister David Lloyd George after touring Germany in late 1936. His recollections paint the society as well established, friendly, and serve as a testimony to the state which Germany was in. He continues, “There is for the first time since the war a general sense of security. The people are more cheerful. There is a greater sense of general gaiety of spirit throughout the land. It is a happier Germany.”[vii]

The average citizen had reason to be happy. The Third Reich glorified the working class. Among many benefits, the German worker saw their wages increase and working conditions improved. It was easier to live, they had money in their pockets, and there were a host of social programs to be involved in.

The Reich emphasized class neutrality, allowing everyone opportunity to rise within the system (given you were Aryan). There were social expectations for everyone. There were clear pathways to success in climbing the social ladder. The population had become united under National Socialism.

Hayek criticized National Socialism because he believed that the social and economic forces that make up the economy should not be significantly regulated by an institution. He believed that the economy should exist as an untampered entity because it is too complex be organized. There is good reason for this. If a government doles out too many free tokens, then they remove the economic incentive for its citizens to work hard. Hayek is worried about governments constraining its citizens. He is worried about the state being responsible for creating the entire economic libido for a society.

What Hayek feared occurred in the Soviet Union. Nazi Germany was expressively different. Privately held businesses were allowed to keep control of their companies and make a profit. It was part of the reason why he beat the communist party, which wanted to take control of all the profits from the industries. The German corporations were taxed at 20-25 percent at the beginning of the Reich, and then rose to 40 percent by 1939-40[viii], which is a very similar rate to the current U.S. corporation tax tables. “According to 2014 data from the OECD,” wrote Forbes contributor and tax analyst Martin Sullivan, “the combined federal and state statutory corporate tax rate for the United States is 39.1 percent.”[ix] There was plenty of incentive for Germans to make new industries under National Socialism, but this would not happen as the country became increasingly occupied in the war effort.

The reason why the German state under Hitler and Nazidom ultimately failed was not because of economic policies but because of their aggressive and ruthless form of nationalism. The Nazi Regime insisted on invading Poland, triggering an eruption of secret alliances, plunging the western world into the second world war. If Germany was only passive socialists, then there would little urge to increase to reclaim the land lost in WWI.

[iv] [Weber] John A. Garraty, “The New Deal, National Socialism, and the Great Depression,” The American HistoricalF Review, Oct. 1973 (Vol. 78, No. 4), pp. 909-910.

[v] [Weber] J. P. Taylor, From Sarajevo to Potsdam (Harcourt Brace Jovanovich, 1975), p. 140. See also: A. J. P. Taylor, The Origins of the Second World War (first published in 1961). See also: Burton H. Klein, Germany’s Economic Preparations For War (Harvard Univ. Press, 1959). Pertinent excerpts from this important book are published in: H. W. Koch, Aspects of the Third Reich (1985), pp. 360-370.